France issues new guidelines on the screening of foreign direct investments: an example to be followed in other EU Member States
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In September, the French Directorate-General of the Treasury published new guidelines on the screening of foreign direct investments (FDI) in France (the "Guidelines"). Highly anticipated, the Guidelines were issued following a consultation with lawyers that took place this summer, bringing investors transparency for a technical and complex subject. The French example could serve as a best practice, encouraging FDI authorities in other countries to adopt similar guidelines for a subject that is often opaque. The 50-page document contains useful guidance, notably on the aspects detailed below.
Concept of Foreign Investor
The Guidelines confirm the broad scope of "foreign investor", which covers any entity under foreign law having a legal personality or not, provided that it is organized and has business activities in the market. Trusts, investment vehicles or SPACs can therefore constitute foreign investors.
To determine the foreign character of an investor, French authorities perform a case-by-case assessment of each transaction, focusing on the chain of control. According to the Guidelines, if a single vehicle in the investor's chain of control is a foreign entity, the investor may qualify as "foreign", even if its top controlling entity is French.
The concept of "control" is assessed primarily in light of French corporate law (Article L.233-3 of the French Commercial Code) and, accessorily, under French merger control rules which may include situations of "negative control" where a minority shareholder is deemed to have controlling rights as a result of veto rights over strategic decisions. In practice, it is sufficient to insert a single foreign holding company, such as Luxco, into a "French" chain of control of an investment fund for the fund to be qualified as a foreign investor.
Passive beneficial owners in the investment fund are generally not considered to have a controlling influence on the fund unless they have specific rights to be verified on a case-by-case basis.
Concept of Foreign Investment
The concept of "foreign investment" is also very broadly interpreted by the Guidelines so as to cover all kinds of transactions (acquisitions of shares, mergers, contributions and transfers, even free of charge) related to a "French entity" active in a sensitive sector. However, the Guidelines expressly exempt from FDI scrutiny any greenfield investments and investments involving only French branches (succursales) of a non-French company.
The Guidelines confirm that "potential" investments where the investor was only granted a right to invest in the future (for example, purchase options) need to obtain prior approval when the investment becomes certain and the right is exercised, not at signing when the right is granted.
French FDI requirements cover the acquisition of "control" in a French entity. In contrast to the determination of the foreign character of the chain of control, the concept of "control" is assessed only in light of Article L.233-3 of the French Commercial Code and not by reference to merger control rules. However, just as merger control rules do, the Guidelines provide for an extensive interpretation of the concept of joint control so as to cover the situation of "negative control" held by minority shareholders that could also trigger FDI filing. A change from joint control to exclusive control, and vice versa, will not trigger FDI screening.
The Guidelines clarify the complex issue of non-controlling indirect minority acquisitions. French FDI requirements apply to acquisition of more than 25% of voting rights, directly or indirectly, in a French entity when the investor is of non-EU/EEA origin, even in the absence of controlling rights. The Guidelines confirm the approach implemented so far by the Directorate-General of the Treasury, which consists of assessing the indirect crossing in relation to the interests held by entities controlled directly or indirectly by the foreign investor. For example, a foreign investor who crosses the threshold of 25% of the voting rights in a target entity is deemed to have indirectly crossed the 25% threshold in any French subsidiary controlled by that entity.
The acquisition of certain assets only of a French entity may be sufficient to trigger control, particularly contracts or IP rights connected to French sensitive activities.
The Guidelines provide general guidance on how the French authorities interpret the "sensitive activities" subject to review, as listed in Article R.151-3 of the French Monetary and Financial Code.
The "sensitivity test" combines a number of factors assessed on a case-by-case basis, including target customers, applications of the products/services concerned, dangerousness and market substitutability. R&D activities at an early stage are receiving increased attention as part of the "sensitivity test".
In the absence of any turnover threshold under French rules, the Guidelines point out that an activity can still be considered "sensitive" regardless of the turnover generated in the market by the French target.
In the event of an investment implemented in breach of the prior approval requirement, the Guidelines show that the foreign investor can remedy the situation by submitting an ex post request for prior approval. This regularization makes it possible to purge the civil nullity of the transaction, but does not exempt the investor from the risk of financial penalty. The Guidelines refer in particular to the existence of criminal sanctions for infringements of the French FDI screening requirements (Article 459 of the French Customs Code).
The Guidelines contain helpful guidance on the setting of conditions and their possible revision. One of the main specificities of French FDI screening is for French authorities to make clearance conditional upon remedies designed to ensure that the investment does not harm national interests, in a significant number of cases. The last annual report published by the Directorate-General of the Treasury on French FDI screening control indicated that out of 124 transactions cleared in 2021, more than half had been subject to conditions. But note that these conditions are rarely very restrictive. The Guidelines detail the monitoring of the conditions by the French competent services and the circumstances under which the conditions may be revised at the request of the Minister or the investor.
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